Have you seen the signs hanging on small local banks recently? They claim to be paying unusually high interest rates on checking accounts. Some have been as high as 6%. It sounds like it would be too good to be true doesn’t it? Well think again.

It is true that these banks are paying 4, 5, or even 6% interest on checking. How can they do this with CDs and money markets paying next to nothing and the government paying 0% on treasuries? It does sound fantastic; however, like a debt group that offers to fix your credit,  it does come with some strings attached. Typically you have to have a minimum balance, usually in the range of $1500, and secondly you have to use your issued debit card around 10 times a month at select merchants.

The minimum balance is typical; however, why would you have to use your debit card 10 times a month? Well the answer is simple. The banks make a ton of money on fees collected from the merchant anytime you use your debit card. They will give you a list of places to use the card then you have to make sure you use it at least the minimum required times or you receive the default interest rate. So the bank is paying you a great rate on your high interest checking, and it is subsidized by the local businesses. It has become popular to use a rewards credit card for purchases and this has been hurting the banks. They get much higher rates when you use your debit card for your purchases. Also, you can specify if you want the transaction to be processed as a credit card or debit card. This allows the banks to control what your answer is to this question and put it in their favor.

I this sounds a little unfair, it is. It is great to get such a fantastic interest rate in this kind of market; however, you have to have a little sympathy for the local businesses. If I was a small business and my bank came out with a list like this, I would be a little upset. Also, what happens when a business is faced with increasing costs? Well, usually the increased costs get passed onto the consumer. So you may get a nice high interest checking account, but it may be negated in the increased costs of goods.

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